S&P loses patience with Yorkshire Water

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The lack of developments on the refinancing of acquisition debt led S&P to cut Kelda’s credit rating by two notches in early March. Was the move premature?

Standard & Poor’s has cut Yorkshire Water’s credit rating by two notches over concerns about its parent group’s high leverage and the delay in arranging a securitisation-style financing structure for the regulated water business.

Private equity consortium Saltaire Water, which acquired Yorkshire’s parent Kelda for about £5.5 billion including debt at the end of 2007, aims to refinance some of the acquisition debt by using the new structure to increase the water company’s gearing from its present level of about 65%.

All the rating agencies had put Yorkshire’s £1.6 billion of outstanding debt (see table) on negative watch pending completion of the refinancing – which will offer bondholders additional covenant protection – though it appears that S&P ran out of patience. It cut its corporate ratings on both Kelda and Yorkshire Water from ‘A-’ to ‘BBB’.

“As far as we are concerned, it was a year and a month since the acquisition was completed, and we thought that was too long,” explained Beatrice de Taisne, S&P’s lead credit analyst on the company. She said the longer the delay, the greater the risk to Yorkshire Water’s cashflows from the overhang of acquisition debt.

But with Saltaire close to finalising the new structure (the company said in response to S&P’s announcement that it would be opening discussions with the Association of British Insurers on migrating the existing Yorkshire bonds “in the coming weeks”) other analysts felt the agency’s decision had been precipitate.

“I think S&P was being a bit premature,” said Robert-Miller Bakewell, an independent analyst covering the water sector.

The other agencies seem prepared to wait a little longer. Oliver Schuh at Fitch said he saw no virtue in downgrading the company now, only to upgrade it again in a few weeks’ time.

There are doubts, however, that Saltaire will be able to secure the 75% gearing at single-A level that past industry securitisations have achieved. “Because they are leveraging up in a less favourable environment, you might not be able to take it up so high,” explained Schuh.